AMBALAL SARABHAI ENTERPRISES LIMITED vs THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1, VADODARA

C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
Reserved On : 18/02/2026
Pronounced On : 12/03/2026
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO.640 of 2022
With
R/TAX APPEAL NO.113 of 2023

FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE A.S. SUPEHIA Sd/-

and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI Sd/-
===========================================================
Approved for Reporting Yes No
a
===========================================================
AMBALAL SARABHAI ENTERPRISES LIMITED
Versus
THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1, VADODARA
===========================================================
Appearance:
MR SAURABH SOPARKAR, SENIOR ADVOCATE, with MR B.S.
SOPARKAR, ADVOCATE (6851) for the Appellant
MR MAUNIL G. YAJNIK for the Opponent
===========================================================
CORAM:
HONOURABLE MR. JUSTICE A.S. SUPEHIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
COMMON CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE A.S. SUPEHIA)
1. The captioned cross appeals filed under
section 260A of the Income Tax Act, 1961(for
short “the Act”) emanates from the judgement and
order dated 25.05.2022 passed by the Income Tax
Appellate Tribunal (ITAT), Ahmedabad in ITA
No.1771/AHD/2015 for Assessment Year (AY) 2001-
2002, and ITA No.1762/AHD/2015 for AY 2001-02,
wherein the Tribunal has partly allowed the
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cross-appeals filed by the assessee and the
Revenue. Both the assessee and the revenue had
challenged the orders passed by Commissioner of
Income Tax (Appeals) (for short “the CIT(A)”), in
which the ITAT partly allowed the Appeals.
2. In Tax Appeal No.640 of 2022 the following
substantial questions of law were formulated vide
order dated 22.01.2024:
(a) Whether in the facts and circumstances of
the case, was the Income Tax Appellate Tribunal
right in confirming dis-allowance of
Rs.5,49,22,119/- in relation to the payment for
gratuity and leave encashment?
(b) Whether in the facts and circumstances of
the case, was the Income Tax Appellate Tribunal
right in law in holding that Receipt of Rs.25
crores on account of transfer of trademarks were
not capital receipt in nature?
(c) Whether in the facts and circumstances of
the case, was the Income Tax Appellate Tribunal
right in law in holding that Receipt of Rs.20
crores on account of transfer of marketing rights
were not capital receipt in nature?
(d) Whether in the facts and circumstances of
the case, was the Income Tax Appellate Tribunal
right in law in holding that Receipt of Rs.2
crores on account of transfer of marketing rights
were not capital receipt in nature?
3. In Tax Appeal No.113 of 2023, this Court
framed the following substantial question of law
was formulated vide order dated 20.06.2023:
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“Whether in the facts and circumstances of the
case and in law , the learned ITAT has erred in
treating Rs.18 crore out of Rs.25 crore shown by
the assessee company as consideration received for
the so called trademark agreement, as capital
gains and deleting Rs.7 crores as capital receipt
instead of the treating of entire sum of Rs.25
crore as revenue receipt chargeable to tax as
business income?
BRIEF FACTS
4. The appellants - assessee - Ambalal Sarabhai
Enterprise Ltd. and M/s.Cadila Health Care formed
50:50 Joint Venture Company (for short “JV
Company”) called ‘Sarabhai Zydus Animal Health
Ltd.’ vide Deed of Assignment dated 29.01.2000,
by selling / transferring 46 veterinary
trademarks/ brand names ‘along with goodwill of
the business’ for the consideration of Rs.73
crores, out of which Rs.25 crores were paid for
the assignment of trademarks and were claimed as
capital receipt, Rs.20 corers for the assignment
marketing rights, the same are also claimed as
capital receipt, Rs.28 crores for the transfer of
know-how, which is offered as revenue receipt and
Rs.2 corers for five years for marketing rights
of ABIC, Bomac and Bristol Myers Squibb which is
also claimed as capital receipt. Thus, the
assessee had transferred its veterinary/ animal
health business to the JV Company.
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
5. The Assessing Officer (for short the “AO”)
passed an order dated 31.03.2004 treating Rs.47
crores as revenue receipts mainly on the ground
that the trademarks were not registered,
trademarks are same as know-how, and by
transferring the marketing rights, income
apparatus is not given up.
6. The aforesaid order culminated into appeal
before the CIT(A), which was partly allowed vide
order dated 12.03.2015.
7. Being aggrieved, the assessee and the revenue
filed appeals before the ITAT. The ITAT confirmed
the order passed by CIT(A) vide judgement and
order dated 25.05.2022 giving rise to the present
appeals.
SUBMISSIONS ON BEHALF OF THE ASSESSEE
Following submissions are made apropos question
No.(a) by learned Advocate Mr.Soparkar:
a) That during the year, certain employees of the
assessee were relieved from employment under the
Voluntary Retirement Scheme (VRS), and they were
paid a total amount of Rs.6,86,52,649/-, and out
of such payment, Rs.1,77,62,048/- was of Gratuity
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under the payment of Gratuity Act, and
Rs.30,93,624/- was paid as Leave Encashment and
Rs.4,77,96,977/- at the time of Voluntary
Retirement. Thus, it is contended that the
th
assessee claimed 1/5 of Rs.4,77,96,977/- as
claim under Section 35DDA of the Act and claimed
full amounts of Rs.1,77,62,048 and Rs.30,93,624/-
as expenses wholly and exclusively expended for
the purpose of business. That the AO held that
th
1/5 of the entire amount of Rs.6,86,52,649/- is
eligible for deduction under Section 35DDA of the
Act and amounts of Rs.1,77,62,048/- and
Rs.30,93,624/- are not allowable as they are
business expenses done separately, which is
erroneous as the assessee has given clear
bifurcation based upon the nature of expenses
and, therefore, payment of Gratuity and Leave
Encashment, although paid at the time of end of
the service, they are not part of VRS as such.
b) That the reliance placed by CIT(A) and the
ITAT on the provision of Section 43B(f) of the
Act since Section 43B of the Act states that
certain expenses are allowable on payment basis
as opposed to accrual. The insertion of Section
43B(f) of the Act provides for additional
condition for allowability of expenses which was
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otherwise allowable without the additional
condition, and that merely because Section 43B(f)
of the Act is inserted subsequently, it does not
mean that the expenditure is allowable thereafter
only, and it means that earlier the expenditure
was allowable without any condition as to the
payment and subsequent to the insertion of
section 43B(f) of the Act, it is allowable with
additional condition of actual payment. It is
contended that one more reason for confirming
dis-allowance of the expenditure by the CIT(A) is
non-supply of the employment contracts, but the
AO never asked for them in the first place. The
CIT(A) in 2015 could not expect the assessee to
produce for the first time, the employment
contracts of employees retired in the year 2000.
It is therefore urged that the claim of the
assessee is correct in fact and in law, and hence
the question may be answered in favour of the
assessee and against the revenue.
Submissions apro pos question No.(b):
c) It is submitted that the assigned Trademarks
are not purchased, but are self-generated over
years. Out of 46 trademarks transferred, 06 are
registered and 40 are pending registration
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(application is made). With transfer of 46
trademarks, it was submitted that the Assessee is
prohibited from manufacturing and marketing of
these products on its own, and the same is a
capital asset and its transfer is a capital
receipt.
d) That, when the agreements of assignment of
trademark, marketing rights and know-how are
distinct and separate, AO cannot modify the same
to hold that a part of the agreement is for
assignment of trademark and a part of it for
goodwill. The deed of assignment is unequivocally
clear as to what is assigned and what are the
trademarks.
e) That, considering Section 37 of the Trade and
Merchandise Marks Act, 1958, assignment of
trademark can happen “with the goodwill of the
business” or “without the goodwill of the
business”. It was submitted that under Trademarks
Act “goodwill of the business” term has wholly
different meaning compared to the term “goodwill”
under Section 55(2)(a) of the Act, and that the
assessee could not have sold only goodwill of the
business without selling its running business.
Admittedly, the assessee has continued to run its
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business even after assignment of trademark.
Therefore, it is inconceivable that the assessee
could only sell the goodwill without actually
selling the running business.
f)That the observations of the ITAT to the extent
that the assignment of Trademark is Revenue
Receipt (Business Income) is ex-facie wrong in
view of the ITAT decision in the case of Cadila
Healthcare Ltd. - ITA No.642/AHD/2005. The same
reasoning holds true for the present assessee
(being the second party to the same arrangement)
as well. Further, the amendment brought in
Section 55(2)(a) of the Act from AY 2002-03
conclusively shows that the said transaction does
not give rise to the Revenue Receipt, but Capital
gain which too is taxable only from AY 2002-03.
g)It was submitted that the argument of the
Revenue that know-how is same as trademark is
fundamentally erroneous, since assignment of
Trademark is recognised under Trade and
Merchandise Marks Act, 1958. That the assessee
has entered into two separate agreements, one for
the transfer of trademarks and one for the
transfer of know-how, and by transferring know-
how the assessee only shares knowledge which it
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could have shared without assignment of
trademark. Therefore, it is completely wrong to
argue that once the Appellant has assigned know-
how as well as trademark, they are one and the
same.
h) While referring to the findings of the ITAT,
recording the non-submissions of books of
account, it is submitted that the reason for the
non-submission of the books of accounts of the JV
for the year 2000-01 by the appellant to the
CIT(A) is that the AO never asked for the same,
since the Appellant had also sold the 50% share
in the JV to the other party to the JV way back
in 2007. It was submitted that therefore it was
not possible for the assessee to produce the same
before the CIT(A). Moreover, the treatment of the
purchase of the trademarks or marketing rights by
the purchaser in its books of accounts would have
no effect so far its non-taxability is concerned
in relation to the assignor-appellant.
Submissions apro pos question Nos.(c) and (d ):
i) Learned Senior Advocate Mr.Soparkar on the
point of marketing rights submitted that the
assessee had exclusive rights to market the
products of ABIC, Bomac and Bristol Myers Squibb
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which allowed the assessee to market their
products in specific regions. That the marketing
rights are given to the assessee without any
cost. It was also submitted that the marketing
rights are capital asset and source of income and
not stock in trade. After the transfer of the
marketing rights, the assessee cannot market
these products. It is also submitted that
subsequent to the transfer, the revenue of the
assessee is severely impacted, since when the
income earning apparatus is transferred the
quantum of the income forgone is not the
determining factor, and the nature of the loss of
apparatus is crucial. In the facts of the case
when the appellant is completely denuded of the
stream of the revenue that may be generated out
of ownership of the exclusive marketing rights,
it is nothing but extinguishment of income
earning apparatus and therefore the compensation
against the same is capital receipt. It was
submitted that compensation received by the
assessee for Transfer of marketing rights are
therefore is a capital receipt and not revenue
receipt. Reliance is placed on the judgement of
Madras High Court in the case of Commissioner of
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
Income Tax vs, Ambadi Enterprise Ltd. , (2004) 139
taxmann 96 (Madras).
SUBMISSIONS ON BEHALF OF THE REVENUE :
8. Learned Senior Standing Counsel appearing for
the Revenue has made the following submissions:
(I) Regarding the substantial question of law
relating to taxability of consideration of Rs.25
crores for assignment trademarks along with the
goodwill of business received by the assessee for
transfer of Trademark along with goodwill of
business to its JV company is taxable as ‘income
from the business and profession’ under section
28(iv) and/or under section 41(1) of the Act; and
alternatively, the said consideration is taxable
as capital gain since the benefit accruing from
business activities carried out by it over the
years, is converted into money and therefore, the
same is taxable as benefit accruing/arising from
business under section 28(iv) of the Act.
Therefore, the benefit which accrued to the
assessee on transfer of said Trademark / brand
name is also liable to be taxed under section
41(1) of the Act.
(II) It is further submitted that in the present
case, over and above, the agreement to transfer
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trademark to the JV, assessee has also entered
into an agreement with the JV for transfer of
“know-how” for transfer of “know-how” qua the
very same 46 trademarks and the same is already
shown as revenue receipt by the assessee and
hence, it is submitted that the transfer of
“know-how” qua the very same 46 trademarks and
consideration received thereof amounting to Rs.28
crores is treated as revenue receipt, then the
transfer of those 46 trademarks whereas, only 6
are registered and 40 are unregistered. Hence,
the said transfer has to be treated as revenue
receipt only.
(III) Regarding taxability of the said
consideration of Rs.25 crores as capital gain, it
was submitted that as stated hereinabove the
assessee had received Rs.25 cores towards the
transfer of Trademark along with goodwill of
business and, it is pertinent to note that
assessee has already received remuneration
amounting to Rs.28 crores by an agreement of
transfer of “know-how” for the very same 46
trademarks along with goodwill of businesss. As
assessee has already received Rs.28 crores for
transferring “know-how” of the very said 46
trademarks and during the argument assessee had
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candidly admitted that trademark is “know-how”
and it is also not the case of the assessee that
only “know-how” was transferred and not the
trademark. It was therefore submitted that the
entire amount of Rs.25 crores received by the
assessee is essentially towards the transfer of
goodwill of business only.
(IV) That in absence of any specific valuation
assigned to trademark, it is not open for the
assessee to contend that the entire amount of
Rs.25 crores is received for the transfer of
trademark only since the assessee has not
bifurcated value of each trademark as out of 46
trademarks only 6 are registered and 40 are
unregistered, and in the absence of any specific
bifurcation for each trademark, it is difficult
to believe that entire consideration was only for
transfer of trademark and not goodwill.
(V) It is contended that though requested to
furnish copy of audited balance-sheet and other
relevant books of account of the JV so that it
could be cross verified that JV has shown 46
trademarks in the balance-sheet as assets and
also, it has claimed depreciation on 46
trademarks only and not on the goodwill, and
since the assessee did not produce the same and
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hence, it cannot be said that only trademarks
were transferred and not the goodwill.
(VI) To consider present transaction as capital
receipt, it was incumbent upon the assessee to
show and to provide adequate documentary evidence
showing that the capital assets (i.e. trademark)
has gone from the balance of the assessee and has
found its place in the balance sheet of the
assignee i.e. (JV). In absence of any documentary
evidence, the CIT(A) and Tribunal has rightly
held the said transaction as capital gain.
(VII) It is also relevant to submit that
subsequent to the decision of the Supreme Court
in the case of CIT vs. B.C. Srinivasa Setty ,
[1981] 128 ITR 294 (SC), there is an amendment in
Section 55(2) of the Act by the Finance Act,
1987, and it is not in dispute that by virtue of
the said amendment, the transfer of self-
generated goodwill is now taxable as capital gain
by taking cost of acquisition of such self-
generated asset as Nil. It is submitted that the
said amendment is clarificatory / declaratory
nature and by virtue of the said amendment in
Section 55(2) of the Act by the Finance Act,
2001, the legislature has merely clarified /
declared that the cost of acquisition in relation
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to self-generated trademark is Nil. It is
therefore submitted that applying the said
amendment retrospectively, even if the entire
amount of consideration of Rs.25 crore is treated
as received towards the transfer of Trademarks
only and the same is taxable as capital gain.
Reliance is placed on the following two decisions
of the Apex Court in the cases of CIT Vs. Podar
Cement Pvt. Ltd ., (1997) 226 ITR 625 (SC), and
ITO vs. Vikram Sujitkumar Bhatiya , (2023) 453 ITR
417 (SC).
(VIII) Further, regarding the reliance of the
assessee on the decision of the Karnataka High
Court in the case CIT, Bangalore vs. of
Associated Electronics & Electrical Industries
(Bangalore) Pvt. Ltd ., (2016) 65 taxmann.com 253
(Karnataka), it is submitted that the said
decision is distinguishable on facts and in law
since in the said case, by way of a legal battle,
a settlement had arrived between the parties and
the mark “SHARP” on 14 goods were transferred in
favour of SHARP corporation and the assessee in
that case, retained to use mark “SHARP” qua 6
items and hence, it was concluded that since
assessee still retained to use mark “SHARP” qua 6
items, it cannot be said that the entire business
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has been transferred and goodwill has also been
transferred.
9. By making the foregoing submissions, it is
thus urged that the impugned order of the ITAT is
erroneous and unsustainable in law to the extent
it is against the revenue.
ANALYSIS AND OPINION :
Answer to Question No.(a):
10. The question No.(a) refers to the dis-
allowance of Rs.5.49 crores in relation to
payment of gratuity and leave encashment to the
employees of the assessee at the time of
voluntary retirement scheme. The assessee claimed
th
1/5 of the amount of Rs.4,77,96,977/- as claim
under Section 35DDA of the Act and claimed full
amounts of Rs.1,77,62,048 and Rs.30,93,624/- as
expenses wholly and exclusively expended for the
purpose of business. The CIT(A) and the ITAT has
allowed the deduction of Rs.1,37,30,530/- under
Section 35DDA of the Act, by holding that the
payment of Gratuity and Leave Encashment, is part
of VRS. Section 35DDA of the Act, allows
businesses to claim a tax deduction for
expenditures incurred on VRS, which is spread
over five years. In order to satisfy us, we had
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called for the VRS dated 12.02.2000. The recitals
of VRS reveals that the employees are paid
compensation for remaining period of services.
Apart from other benefits, which are paid under
the Scheme, the employees are paid the amount of
gratuity as per payment of gratuity act, and
leave encashment. Thus, albeit it can be said
that the employees are paid the amount of
gratuity and leave encashment, however, such
benefits are ancillary, which are paid on
voluntary retirement/retirement. The intent of
section 35DDA of the Act, is that the payment of
expenditure to an employee should have been made
in connection with his voluntary retirement under
a scheme of such retirement. On fulfilment of
these conditions, one-fifth of the expenditure
would fall for allowance in the year of payment
and the balance will be allowed in four equal
annual instalments. In the instant case, there
are two components of the VRS. One is the payment
of compensation to the employees who opt for VRS,
whereas the second is the payment of gratuity and
leave encashment towards the service rendered by
the employees, which an employee is otherwise
entitled on retirement, whether voluntary or in
retirement in due course on reaching the age of
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superannuation. Thus, the benefit of gratuity and
leave encashment are the post-retirement benefits
accruing from the actual service rendered by an
employee. These benefits are governed by
respective rules/clauses of the employment. The
assessee has offered bifurcation of the amount
under VRS and the amount of leave encashment and
gratuity however, the AO has restricted the
th
claim to 1/5 of the amount paid under the VRS,
and the remaining claim is disallowed. This
approach is erroneous in view of the VRS, which
has separate benefit of compensation and as held
by us, the amount of leave encashment and
gratuity are paid on the voluntary retirement,
and cannot be said to be part of the VRS. The
assessee had categorically offered the
compensation payable under the VRS under section
35DDA of the Act minus the terminal benefits to
th
be amortized by granting 1/5 . The CIT(A) has
rejected the contention of the assessee on the
ground that the assessee had not produced any
agreement or contract which had taken place
between the assessee and its employees. It is not
in dispute that the assessee was never called
upon to produce the same by the AO hence, the
CIT(A) and the ITAT have fell in error confirming
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the assessment order of the AO in making
additional dis-allowance, and treating the amount
of gratuity and leave encashment inclusive of
VRS. The additional ground which has weighed upon
the CIT(A) is that the provision of section
43B(f) of the Act, which states about “any sum
payable the employer/assessee in lieu of any
leave at the credit of his employee”, has been
introduced w.e.f. 01.04.2002 vide Finance Act,
2001, and hence, the same will be applicable from
such date. We find the view expressed by CIT(A)
as erroneous for the reason that the sum payable
towards gratuity was falling part of the
deduction under section 43B(b) of the Act, which
is paid for the welfare of the employees.
Similarly, the amount of leave encashment is paid
as a welfare/benefit to the employees on their
retirement or cessation of service. Thus, merely
because the sum payable on leave encashment has
been introduced w.e.f 01.04.2002, the expenditure
incurred by an assessee prior to the said date
becomes allowable prior to said date only. The
same becomes allowable only after its actual
payment after 01.02.2002, and it was allowable
without any condition of actual payment prior to
such date.
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11. Thus, both CIT(A) and ITAT have taken an
erroneous view, hence the substantial question of
law (a) is answered in favour of the assessee,
and against the revenue.
Answer to Question No.(b) and question No.A of
Tax Appeal No.113 of 2023:
Whether Receipt of Rs.25 crores on account of
transfer of trademarks were not capital receipt
in nature?
12. The appellants – assessee - Ambalal Sarabhai
Enterprise Ltd. and M/s Cadila Health Care formed
50:50 Joint Venture Company called ‘Sarabhai
Zydus Animal Health Ltd.’ vide Deed of Assignment
dated 29.01.2000, by selling/ transferring 46
veterinary trademarks/ brand names ‘along with
goodwill of the business’ for the consideration
of Rs.73 crores, out of which 25 crores are paid
for assignment of trademarks and were claimed as
capital receipt. However, the same has been
treated as revenue receipt. The Revenue has
considered that the factum of non-registration of
40 trademark out of 46 trademark and not offering
the value of trademarks depending on their scope
and commercial value;
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13. Before, we answer the foregoing question, we
may mention similar issue was examined by the
ITAT in case of same parties i.e M/s Cadila
Health Care along with Ambalal Sarabhai
Enterprise Ltd., which had formed 50:50 Joint
Venture Company called ‘Sarabhai Zydus Animal
Health Ltd.’ vide Deed of Assignment dated
15.06.2000, by selling/ transferring 22
veterinary trademarks/ brand names ‘along with
goodwill of the business’ for the consideration
of Rs.29.10 crores. By the judgement and order
dated 20.10.2006 passed by the Income Tax
Appellate Tribunal, Ahmedabad in ITA
No.642/AHD/2005 for Assessment Year(AY), 2001-
2002, and ITA No.1302/AHD/2005 for AY 2001-02
the Tribunal has held in favour of the assessee.
The Tribunal has held thus:
“14. … … …
(b) We have no hesitation in holding that the
trade marks/brand names under consideration are
required to be treated as "capital assets". The
Assessee is right in contending that section
2(14) which defines a "capital asset", covers
within its scope "property of any kind held by an
assessee whether or not connected with business
or profession" In fact, even the Hon'ble Supreme
Court has rightly held in the case of CIT v/s
Express Newspapers Ltd. 53 ITR 250 (SC), "the
fact that capital gains are connected with the
capital assets of the business will not make that
profits of business" Under the circumstances, the
conclusion sought to be drawn by the Assessing
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Officer in the assessment order that the sale
consideration of Rs.29.10 crores for assignment
of trade marks/ brand names should be treated as
business income is required to be rejected in
toto.
(c) Once it is held that the trade marks/brand
names assigned by the appellant are capital
assets under section 2(14) of the Income tax Act,
the only logical conclusion that can follow is
that the resultant gains from the transfer or
assignment of the same are in the nature of
capital gains. However, as held by the Hon'ble
Supreme Court in the case of CIT v/s B.C.
Srinivasa Setty, 128 ITR 294(SC), "none of the
provisions pertaining to the head "capital gains"
suggest that they include an asset in the
acquisition of which no cost at all can be
conceived. “If the asset under consideration is a
self generated asset, it does not fall within the
purview of section 45 r.w.s. 48 of the Income tax
Act. The issue for consideration, therefore, is
whether the trade marks/brand names under
consideration can be classified as "self
generated assets" it has not been disputed even
by the Assessing Officer that the trade
marks/brand names were in any manner purchased or
acquired by the appellant for any consideration.
The Assessee has rightly contended that in
respect of the trade marks/brand names of its
Veterinary Division, which came to be assigned to
Sarabhai Zydus Animal Health Ltd., no cost of
acquisition was incurred by it and they were
generated or evolved in the business over the
years. The Assessing Officer has tried to take
the view that for building brand name, systematic
efforts in terms of man, maternal and money are
needed and, therefore, in his view, it was not
proper to say that for generating trade
marks/brand names, no cost has been incurred.
However, the finer aspect of the evaluation of
the intangible assets such as trade marks has
been lucidly explained in the land mark judgement
of the Apex Court in B.C. Srinivasa Setty(Supra).
The following ratio of the said judgment in
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regard to the evaluation of "Goodwill" would
squarely apply in the case of the evaluation of
intangible assets such as trade mark/brand name:
"In a progressing business goodwill tends to show
progressive increase and in a failing business it
may begin to wane. Its value may fluctuate from
one moment to another depending on changes in the
reputation of the business. It is affected by
everything relating to the business, the
personality and business rectitude of the owners,
the nature and character of the business, its
name and reputation, its location, its impact on
the contemporary market, the prevailing socio-
economic ecology, introduction to old customers
and agreed absence of competition. There can be
no account in value of the factors producing it.
It is also impossible to predict the moment of
its birth. It comes silently into the world
unheralded and unproclaimed and its impact may
not be visibly felt for an undefined period.
Imperceptible at birth it exists enwrapped in a
concept, growing or fluctuating with the numerous
imponderables pouring into, and affecting the
business"
In our view, therefore, the trade marks/brand
names in the case of the Assessee are clearly
required to be held as "self generated".
14. Thus, on a similar issue, the ITAT by placing
reliance on the judgement of the Apex Court in
the case of B.Srinivasa Setty (supra ) has
previously held in favour of the assessee. The
cross-Tax Appeal Nos.1234 of 2007 and
642/AHD/2005 were admitted by formulating an
identical substantial question of law. The same
is decided by separate judgement and order.
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15. We may at this stage, refer to the legal
precedent governing the issue. The Supreme Court
in the case of B.C.Srinivasa Shetty (Supra ),
while dealing with the sections 45, 48 and
section 55(2) of the Act in context of capital
gain arising from the sale of goodwill has held
thus:
“9. The point to consider then is whether if the
expression "asset" in section 45 in construed as
including the goodwill of a new business, it is
possible to apply the computation sections for
quantifying the profits and gains on its trans-
fer.
10 The mode of computation and deductions set
forth in Section 48 provides the principal basis
for quantifying the income chargeable under the
head "Capital gains". The section provides that
the income chargeable under that head shall be
computed by deducting from the full value of the
consideration received or accruing as a result of
the transfer of the capital asset :
"(ii) the cost of acquisition of the capital as-
set ... "
11 What is contemplated is an asset in the acqui-
sition of which it is possible to envisage a
cost. The intent goes to the nature and character
of the asset, that it is an asset which possesses
the inherent quality of being available on the
expenditure of money to a person seeking to ac-
quire it. It is immaterial that although the as-
set belongs to such a class it may, on the facts
of a certain case, be acquired without the pay-
ment of money. That kind of case is covered by
Section 49 and its cost, for the purpose of Sec-
tion 48 is determined in accordance with those
provisions. There are other provisions which in-
dicate that Section 48 is concerned with an asset
capable of acquisition at a cost. sec. 50 is one
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such provision. So also is sub-sec. (2) of Sec-
tion 55. None of the provisions pertaining to the
head "Capital gains" suggests that they include
an asset in the acquisition of which no cost at
all can be conceived. Yet there are assets which
are acquired by way of production in which no
cost element can be identified or envisaged. From
what has gone before, it is apparent that the
goodwill generated in a new business has been so
regarded. The elements which create it have al-
ready been detailed. In such a case, when the as-
set is sold and the consideration is brought to
tax, what is charged is the capital value of the
asset and not any profit or gain.
12 In the case of goodwill generated in a new
business there is the further circumstance that
it is not possible to determine the date when it
comes into existence. The date of acquisition of
the asset is a material factor in applying the
computation provisions pertaining to capital
gains. It is possible to say that the "cost of
acquisition" mentioned in sec. 48 implies a date
of acquisition, and that inference is strength-
ened by the provisions of Ss. 49 and 50 as well
as sub-sec. (2) of Section 55.
13 It may also be noted that if goodwill gener-
ated in a new business in regarded as acquired at
a cost and subsequently passes to an assessee in
any of the modes specified in sub-sec. (1) of
Section 49, it will become necessary to determine
the cost of acquisition to the previous owner.
Having regard to the nature of the asset, it will
be impossible to determine such cost of acquisi-
tion. Nor can sub-sec. (3) of sec. 55 be invoked,
because the date of acquisition by the previous
owner will remain unknown.
14 We are of opinion that the goodwill generated
in a newly commenced business cannot be described
as an "asset" within the terms of sec. 45 and
therefore its transfer is not subject to income-
tax under the head "capital gains".”
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16. The aforesaid judgement has been followed by
the High Court of Bombay in the case of Fernhill
Laboratieries and Industrial Establishment
(supra ). The Bombay High Court has also
considered the amendment to section 55(2)(a) of
the Act introduced w.e.f. 01.04.2002, and it is
held that the same applies prospectively. It has
held thus:
“ 8 . We have considered the rival submissions.
Section 45 of the Act is a charging section for
the purpose of levying capital gains. However to
impose the charge, parliament has enacted
provision to compute profits or gains under that
head. Section 48 of the said Act provides the
manner in which the income chargeable under the
head capital gains is to be computed i.e. by
deducting costs of acquisition of the capital
asset from the full consideration received on the
transfer of the capital asset. The Supreme Court
in the matter of B. C. Srinivasa Shetty (supra)
was dealing with the issue whether the transfer
of the goodwill by partnership firm can give rise
to a capital gain tax under Section 45 of the
said Act. The Apex Court held that where the cost
of acquisition of the capital asset is nil then
the computation provision fails and the transfer
of goodwill not give rise to capital gains tax.
Prior to the amendment made to Section 55(2) by
the Finance Act, 2001 effective from 1/4/2002 by
adding the words "trade mark or brand name
associated with the business" self generated
assets such as trademark did not have any cost of
acquisition. Therefore, for the period under
consideration the computation provision under
Section 48 of the said Act fails resulting in
such transfer of trade marks not being chargeable
to capital gains tax. Consequent to amendment
made to Section 55(2) with effect from 1/4/2002
by which the words trade mark or brand name
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associated with the business was introduced into
it, the computation provision becomes workable
and the consideration received for the sale of
trade mark would be subject to capital gains tax.
However, for the period prior to 1/4/2002 the
sale of self generated trademark is not liable to
capital gains tax. In fact, when the amendment
was made to Section 55 by Finance Act, 2001 the
Central Board of Excise and Customs had issued a
circular bearing No.14/2001 explaining the
provision of the Finance Act, 2011 relating to
direct taxes provided as under:
"42- Providing for cost of acquisition of
certain intangible capital asserts under
section 55
42.1 Under the existing provisions of sub-
section (2) of section 55 of the Income tax
Act, the cost of acquisition of an intangible
capital asset, being goodwill of a business or
a right to manufacture, produce or process any
article or thing, tenancy rights, stage
carriage permits or loom hours, is the purchase
price in case the asset is purchased by the
assessee from a previous owner, and nil in any
other case. It was pointed out that certain
similar self generated intangible assets like
brand name or a trademark may not be considered
to form part of the goodwill of a business and
consequently it may not be possible to compute
capital gains arising from the transfer of such
assets.
42.2- The Act has therefore amended clause
(a) of sub-section (2) to provide that the cost
of acquisition in relation to trademark or
brand name associated with a business shall
also be taken to be the purchase price in case
the asset is purchased from a previous owner
and nil in any other case.
42.3- This amendment will take effect from 1st
April, 2002, and will , accordingly, apply in
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relation to the assessment year 2002-2003 and
subsequent years."
(9) From the above circular, it would be clear
that the amendment bringing self generated
intangible assets such as trademark to capital
gains tax only with effect from Assessments Year
2002-03 onwards. In this case, we are concerned
with Assessment Year 1999-2000 and therefore,
the amendment would not have any effect. Further
as held by the Supreme Court in the matter of
Dy. CIT v/s. Core Health Care ltd. reported in
298 ITR 194 that a provision introduced with
effect from a particular date would not have
retrospective effect unless it is expressly
stated to be so. Consequently, the sale of self
generated trade marks during the Assessment year
1999-2000 are not chargeable to capital gains
tax. So far as the sale of self generated
designs (i.e. not acquired) the same is also not
chargeable to capital gains tax not only for the
reasons applicable to trade marks but for the
fact that even till this date, no amendment has
been made to Section 55(2) of the said Act
defining cost of acquisition of design as in the
case of trademark goodwill etc.”

17. Similarly, the Karnataka High Court in the
case of Associated Electronics & Electrical
Industries (Banglore) (P) Ltd. (supra ), wherein
the High Court while considering the Deed of
Assignment assigning the trademarks along with
the goodwill of the Assignor's business in
context of the aforesaid provisions has held
thus:
“14. A reading of these provisions would make it
clear that any profits or gains arising from the
transfer of a capital asset effected in the
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previous year shall be chargeable to income tax
under the head 'capital gains'. The income
chargeable under the head 'capital gains' shall
be computed as per the provisions of Section 48
of the Act. In the present case, the said
computation shall be, deducting the cost of
acquisition of the asset from the full value of
consideration. The cost of acquisition in
relation to a 'capital asset' in case of goodwill
of a business, shall be taken to be 'Nil', as the
question involved is relating to the transfer of
goodwill of a business.
15. Section 55(2) of the Act is amended by
Finance Act, 2001 inserting the words 'or a
trademark or brand name associated with a
business'. Thus, it is clear that the cost of
acquisition in relation to a trademark or brand
name associated with the business comes within
the tax net subsequent to 1.4.2002. Admittedly,
the said amendment is not applicable to the
present case. Hence, the assessment to capital
gains can be sustained only if the capital asset
transferred was the 'goodwill of the business' of
the company.
16. The expression 'goodwill' has been considered
and explained by the Apex Court in 'S.C. Cambatta
& Co. (P.) Ltd.'s case (supra), wherein their
Lordships having considered the Judgments of
various Courts, have held as under:
"6. It will thus be seen that the goodwill of a
business depends upon a variety of circumstances
or a combination of them. The location, the
service, the standing of the business, the
honesty of those who run it, and the lack of
competition and many other factors go
individually or together to make up the goodwill,
though many other factors go individually or
together to make up the goodwill, though locality
always plays a considerable part. Shift the
locality, and the goodwill may be lost. At the
same time, locality is not everything. The power
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to attract custom depends on one or more of the
other factors as well. In the case of a theatre
or restaurant, what is catered, how the service
is run and what the competition is, contribute
also to the goodwill."
17.  The Hon'ble Apex Court in Guzdar Kajora Coal
Mines Ltd.'s case (supra), was dealing with the
case of the purchases made by the Assessee
therein by Deed of Conveyance executed by the
liquidators of Guzdar Kajora Colliery Co., Ltd.,
all the colliery lands, hereditaments and
premises, mines, minerals, powers and privileges
and all other hereditaments together with the
machinery thereon belonging to the latter
company. It is held that even if it is not
expressly mentioned that goodwill has been sold,
it can be shown and ascertained by evidence
whether the same has been purchased or not by the
Assessee.
18.  In the case of R.C. Cooper v. Union Of
India (AIR 1970 SC 564), the Apex Court has held
that goodwill of a business is an intangible
asset representing the whole advantage of
reputation and connection formed with the
customers together with the circumstances making
the connection durable.
19.  In Corpus Juris Secondum, it has been
observed that "goodwill" has no existence except
in connection with the continuing business.
20.  In the case in IRC v Muller & Co.'S Margarine
Ltd. 1901 AC 217 Lord Machnaghten has observed
thus:
"What is goodwill? It is a thing very easy to
describe, very difficult to define. It is the
benefit and advantage of the good name,
reputation, and connection of a business. It is
the attractive force which brings in custom. It
is the one thing which distinguishes an old
established business from a new business at its
first start….. if there is one attribute common
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to all cases of goodwill it is the attribute of
locality. For goodwill has no independent
existence. It cannot subsist by itself. It must
be attached to a business. Destroy the business,
and the goodwill perishes with it, though
elements remain which may perhaps be gathered up
and be revived again".
21.  Section 37 of the Trade and Merchandise Marks
Act, 1958 provides for assignability and
transmissibility of registered trademarks which
is as under:
"Notwithstanding anything in any other law to the
contrary, a registered trade mark shall subject
to the provisions of this chapter, be assignable
and transmissible, whether with or without the
goodwill of the business concerned and in respect
either of all the goods in respect of which the
trade mark is registered or of only some of those
goods".
22.  The meaning of the expression "goodwill" as
explained in these judgments referred to above
vis-à-vis the provision of Trade and Merchandise
Marks Act, 1958 makes it clear that the 'trade
mark' and 'goodwill' are two distinct separate
concepts. Section 55(2)(b) of the Act prior to
the amendment provided for the levy of tax on
capital gains in relation to a capital asset,
being goodwill of a business. Insertion of the
words, "registered trademarks or brand name
associated with the business" by the Finance Act,
2001 depicts the intention of the Legislature to
levy tax in relation to capital asset, being a
trade mark or brand name associated with the
business, which was not exigible to tax during
the relevant assessment year.
xxxxxx
27.  We have perused the relevant clauses of the
settlement deed entered into between the parties
extracted supra, which clearly indicates, the
assignment made by the assessee company to M/s
Sharp Corporation, is only transfer of trademarks
and the goodwill associated with the trade marks.
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It cannot be misconstrued to that of goodwill of
a business. It is observed in the judgment of the
ITAT, "it is common ground before us that the
assessee did not sell its entire business
undertaking to Sharp Corporation". This admitted
fact itself proves that the assessee has
transferred only the trademarks and not the
goodwill of a business. Even assuming the
goodwill related to the trade mark is
transferred, it cannot be construed as the
goodwill of a business. If the arguments of the
revenue that the transfer of trade mark itself is
goodwill of a business is accepted, then there
was no necessity for the Legislature to amend
Section 55(2)(a) of the Act inserting the words
"trade mark" or "brand name" associated with the
business by Finance Act, 2001.”
18. A holistic reading of the foregoing
observations dealing with the assignment of
trademark along with goodwill of business prior
to amendment in section 55(2)(a) of the Act
w.e.f. 01.04.2002 read with sections 45 and 48 of
the Act, establishes that the consideration
received on “transfer of trademark along with
goodwill”, is not chargeable to tax and will not
be an “asset” to attract the charging provision
of section 45(1) of the Act, and its assignment/
transfer is not subject to income tax under the
head of “capital gains”. In the instant case, we
disagree with the findings of the Tribunal that
in fact, the assessee has transferred the
trademark, but not the good will. From the
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assignment deed, it is evident that what is
transferred is 46 self-generated trade marks for
Rs.25 crores, as appearing at Schedule to the
Deed of “Assignment of Trademarks” dated
15.06.2000. The assessee is a manufacturing
pharmaceutical company and the 46 trademarks are
transferred along with goodwill of the business
concerned in the goods for which these trademarks
were transferred. The pharmaceutical business of
the assessee is not entirely transferred, and it
retains substantial business with it. It is
settled legal precedent that goodwill has no
independent existence, and it cannot subsist by
itself, and is attached to a business, and if the
business is destroyed the goodwill also perishes
with it, though some elements remain which may
perhaps be gathered up and be revived again.
19. Section 2(47) of the Act classifies transfer
in relation to categories of capital gains.
Section 2(24)(vi) of the Act mentions that income
includes any capital gains chargeable under
section 45 of the Act. Section 45 of the Act
stipulates that any profits and gains arising
from the transfer of capital assets shall be
chargeable to income tax under the head of
capital gain. Capital asset has been defined
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under section 2(14) of the Act. Thus, there has
to be transfer of capital asset for satisfied
capital gains. Section 48 of the Act provides the
Mode of Computation on the income chargeable
under the head "Capital gains" by deducting from
the full value of the consideration received or
accruing as a result of the transfer of the
capital asset on i) expenditure incurred wholly
and exclusively in connection with such transfer;
and, ii) the cost of acquisition of the asset and
the cost of any improvement thereto. Section
2(22)(B) of the Act defines fair market value in
relation to an of the asset which means the price
that the capital asset would ordinarily fetch on
sale in open market, and ii) where the price
referred is not ascertainable, such price as may
be determinable as per rules made under the Act.
At this stage in order to answer the situation
arising from the interpretation and applicability
of the statute on the consideration received on a
capital asset liable to tax, the law declared by
the Supreme Court in the case of B.C.Srinivasa
Shetty (supra ) comes into play. The Supreme Court
has observed the nature of the acquisition of
asset of which it is possible to envisage cost
under section 48 of the Act and that there are
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other provisions which indicate that Section 48
of the Act is concerned with an asset capable of
acquisition at a cost and Section 50 of the Act
is one such provision. So also is sub-section (2)
of Section 55 of the Act, which stipulates the
Meaning of 'adjusted', 'cost of improvement' and
'cost of acquisition. The case of the respective
parties hinges on the provision of Section 55(2)
(a) of the Act, which reads thus:
“Section 55:
(2) For the purposes of sections 48 and 49, "cost
of acquisition" –
(a) in relation to a capital asset, being
goodwill of a business [or a trade mark or
brand name associated with a business or a
right to manufacture, produce or process any
article or thing or right to carry on any
business, tenancy rights, stage carriage
permits or loom hours,-
(i) in the case of acquisition of such asset
by the assessee by purchase from a
previous owner, means the amount of the
purchase price; and
(ii) in any other case [not being a case
falling under sub-clauses(i) to (iv) of
sub-section(1) of section 49, shall be
taken to be nil;"
20. Thus, none of the provisions pertaining to
the head "Capital gains" suggests that they in-
clude an asset in the acquisition of which no
cost at all can be conceived. Section 55(2) of
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the Act is amended by Finance Act, 2001 inserting
the words 'or a trademark or brand name associ-
ated with a business' having prospective effect.
Thus, it is apparent that that the cost of acqui-
sition in relation to a trademark or brand name
associated with the business comes within the
purview of taxability subsequent to 01.04.2002.
In the instant case, the amendment is not appli-
cable since the entire transaction is prior to
the cut-off date.
21. On the facts and in the circumstances of the
assessee's case, the AO was not justified in
taxing the consideration of Rs.25 crores received
for assignment of Trade Marks as business income
of the assessee. For justifying his reasoning for
taxing the said receipt as business income, the
Revenue has relied upon the provisions of
Sections 28(iv) and 41(1) of the Act. In our
view, none of the provisions under either of
these sections can be applied on the facts of the
instant case, since Section 28(iv) of the Act
provides that "the value of any benefit or
perquisite, whether convertible into money or
not, arising from the exercise of a business or a
profession" shall be chargeable to Income tax
under the head "profits and gains of business or
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profession. The sale consideration for assignment
of trade marks as a benefit or perquisite arising
from the exercise of a business cannot be treated
as the value of any benefit or perquisite arising
from the business or a profession, more
particularly, when the same are self-generated
and cost of acquisition cannot be ascertained.
22. Section 41(1) of the Act provides that
"where an allowance or deduction has been made in
the assessment for any year in respect of loss,
expenditure on trading liability incurred by the
assessee and subsequently during any previous
year, the person has obtained any amount or
benefit, whether in cash or in any other manner
whatsoever, the amount obtained by such person or
the value of benefit accruing to him shall be
deemed to be profits or gains of business or
profession. In in this regard, we may remark that
the AO has not attempted to carve out any case
for the revenue for taxing the sale consideration
of trademarks as profit chargeable to tax under
section 41(1) of the Act. It appears that such
contention is raised before us in the present tax
appeal.
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
23. The Revenue has considered that the factum of
non-registration of 40 trademark out of 46
trademark and not offering the value of
trademarks depending on their scope and
commercial value, and the assessee has not
furnished the audited balance sheet for cross
verification that JV has shown the trademarks in
their balance sheet as capital asset. It appears
that the revenue is oblivious of the fact that JV
is a separate entity, and assessee is not
supposed to furnish the audited balance sheet of
JV. Section 39 of the Trademarks Act, 1999
stipulates that an unregistered trade mark may be
assigned or transmitted with or without the
goodwill of the business concerned. Merely,
because the transfer is of an unregistered
trademark, the same will not ipso facto make such
transfer chargeable to capital gains. The nature
of non-registered trademark will remain as an
intangible asset. The consideration received on
transfer of non-registered trademark prior to the
amendment made to Section 55(2) of the Act w.e.f.
01.04.2002 would not be subject to capital gains
tax.
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
24. Thus, on an overall analysis of recital of
assignment deed, the statutory provisions and
legal precedent, we are of the opinion that both
the CIT(A) and ITAT have taken an erroneous view
in treating the receipt of Rs.25 crores on
account of transfer of trademarks as revenue
receipts and not capital receipt. Hence the
substantial question of law (b) and substantial
question of law (a) in Tax Appeal No.113 of 2023
is answered in favour of the assessee, and
against the revenue.
Answer to Substantial Question of Law (c & d )
25. The assessee has claimed Rs.20 cores and Rs.2
crores for assignment of marketing rights as
capital receipt, whereas the revenue has held in
converse. The assessee had offered that the
acquisition in respect of the market rights were
Nil, and the assessee had an exclusive right to
market the products of ABIC, Bomac and Bristol
Myers Squibb which allowed the assessee to market
their products in specific regions, and the
marketing rights are given to the assessee
without any cost. The assessee before the revenue
had contended that that the marketing rights are
capital asset and source of income and not stock
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
in trade, and after the transfer of the marketing
rights, the assessee cannot market these
products, and by such transfer, the assessee has
given away its earning apparatus to JV. The
CIT(A) has simply rejected the claim of the
assessee that by transfer of know-how, assignment
of trademarks and marketing rights, the assessee
has converted its business into JV, wherein the
appellant also continues to get the same profit
without any loss risk. The CIT(A) has also
rejected the contention of the assessee relating
to the loss suffered after the transfer of
trademarks and marketing rights by holding the
loss as superficial.
26. We do not agree with the proposition of
revenue on this issue. It is not in dispute that
marketing is an income earning apparatus, and on
its transfer, the assessee has been stripped of
from its revenue generated through marketing
rights, thus the compensation which is received
by the assessee is a capital receipt and not
revenue receipt. Subsequent to the transfer, the
revenue of the assessee is severely impacted,
which is substantiated from the following,
however the CIT(A) has considered the
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
compensation as revenue receipt by holding the
loss as superficial.
AY 2000-01 AY 2001-02
Turnover Rs.230.99 crores Rs.199.45 crores
Profit Rs.3.45 crores Loss of Rs.1.93 crores
The quantum of loss cannot be a determinative
factor of treating the compensation as revenue
receipt. The Revenue has botched up two distinct
transactions i.e, transfer of trademark and
marketing rights. The ITAT has failed to consider
that on transfer of trademarks and marketing
rights, the assessee will not be able to earn
from such products, and at the most, it would
earn dividends declared if any by the JV. The
CIT(A) has also erred in holding that the
assessee has not relinquished the right of
manufacturing. In this context, it may be
mentioned that the assessee has entered into two
separate agreements for transferring of
trademarks and know-how. The Revenue has
erroneously held the know-how equivalent to
trademark. By transferring these assets, there is
cessation of income. Like the trademarks, the
know-how is a self-generated asset, and will not
fall within the scope of section 55(2)(a) of the
Act. The Madras High Court in the case of Ambadi
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
Enterprise Ltd.(supra ) has held that in case the
ties with profit earning apparatus are snapped,
the amount received, whether as consideration or
compensation would be capital receipt. In the
instant case, after the transfer of trademark,
know-how and the marketing rights, the assessee
is prohibited from manufacturing the products
relating to 46 trademarks, and thereby precluded
from exploiting the source of income. Hence, on
transfer of such capital asset it would be
taxable as capital receipt and not revenue
receipt. Thus, the compensation received by the
assessee on the assignment of marketing rights
and know-how will not be assessable to tax.Both
the CIT(A) and ITAT have taken an erroneous view
and hence, the substantial question of law (c &
d) is answered in favour of the assessee, and
against the Revenue.
27. Thus, the substantial questions of law, ‘a to
d’ formulated in Tax Appeal No.640 of 2022 is
answered in favour of assessee and against the
revenue. Consequently, the question No.A
formulated in Tax Appeal No.113 of 2023,
accordingly stands answered against the revenue.
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C/TAXAP/640/2022 CAV JUDGMENT DATED: 12/03/2026
28. Thus, the Tax Appeal No.640 of 2022 is
allowed . The impugned order passed by the ITAR is
quashed and set aside. Tax Appeal No.113 of 2023
is dismissed . Registry to place a copy of this
judgment in the connected Tax Appeal.
Sd/- .
(A. S. SUPEHIA, J)
Sd/- .
(PRANAV TRIVEDI,J)
*
Bhavesh-[PPS]*
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